Effective Corporate Engagement

Japan reforms aim to improve market

By Mona Ivinskis

Japan’s Financial Services Agency and the Tokyo Stock Exchange have implemented regulations meant to improve the country’s financial landscape. The Corporate Governance Code is aimed at companies, while the Stewardship Code targets investors. Both sides are seeking ways to effectively engage with one another under the new guidance.

On March 6, the Alternative Investment Committee of the American Chamber of Commerce in Japan held a luncheon at the ANA InterContinental Hotel in Tokyo, where perspectives on the subject were shared by Masaki Gotoh, partner, chief investment officer, and portfolio manager at Misaki Capital Inc.; Ken Hokugo, director and head of corporate governance at Pension Fund Association of Japan; and Toshi Oguchi, representative director of GO Investment Partners LLP.

CODES
In his opening presentation, Oguchi spoke on how the Corporate Governance Code has brought drastic improvement in board independence and increased the number of outside directors.
An increasing number of tactics used to discourage hostile take­overs are being removed, and he feels reforms have been “sensitive to the local customs” by focusing on long-termism and by maintaining the stakeholders’ character­istics by including share­holders and not being hostile. The result of this has been constructive engagement.

Hokugo addressed reforms from a user perspective, suggesting that there are still things to be fixed in the corporate gover­nance and stewardship codes—particularly the ten­dency to have shareholders who show allegiance to the company and the need for more collective engagement.

He noted that Japan’s Stewardship Code is the only one in Asia that does not explicitly encourage collective engagement.
Gotoh described a consulting-based approach used by his company, where the focus is on what will benefit the business.

SUCCESS
Moderator Alicia Ogawa­—who is the director of Project on Japanese Corporate Governance and Stewardship at The Center on Japanese Economy and Business at Columbia Business School—asked the panelists about their views on the success of the codes.
Oguchi emphasized the role they play in productivity and the importance of this to Japan’s economy.

Hokugo sees another opportunity. “More foreign asset management firms will come back to Tokyo,” he said, pointing out that there were many foreign asset management companies in Tokyo 10 or 15 years ago, but they left. Why did they leave? “Well, maybe tax reasons,” he continued, “but more than that, there are no opportunities to do business here . . . Companies are very well protected today by shareholders and cannot be taken over by anybody.”

CHALLENGES
Ogawa reviewed the US and Japanese legal systems, the composition of capital market systems, their shareholders, and what it all means for handling the issue of corporate governance.

“In the case of the United States, until very recently, corporate governance just meant compliance, reducing risk,” she said.

Compared with the United States, where she said there are only two players—investors and management—Japan has a larger ecosystem.

“It’s a very shareholder kind of privacy system, but it is changing a little bit,” Ogawa said, referring to the tendency of investors to overrule management.

“I think Japan has the opportunity to create something that’s even better than what we have—or can at least serve as a model for the United States.”

She noted that there are areas where Japan lags behind, and many require­ments have been put on companies in terms of asset management, steward­­ship code, and the corporate governance without much strategy or thought about the long-term impact.

“I’ve talked to a lot of people who are just ticking the box. If you don’t want it to become a box-ticking exercise, don’t create so many boxes!”